Do boards need better governance?

The Financial Reporting Council (FRC) is the UK’s independent regulator, with a remit to promote high quality corporate governance and reporting in order to encourage investment. In January, the FRC published its annual report ‘Developments in Corporate Governance and Stewardship 2016’, a document that shed light on the quality of compliance within companies and boards. While it would seem that the results were positive overall, the report still placed an emphasis on the need to evolve corporate governance and set out the role that the FRC thinks boards should play in driving and reviewing corporate culture.

The Council claims the report was released against “a backdrop of falling public trust in business” and proposes steps that boards should take to rebuild faith in them. That trust is important; a lack of public trust leads to lack of the investment that is vital for business, beneficial for society and essential for the wellbeing of the economy. We contend that boards must take immediate and necessary steps to better their governance practices. If they can do this, they may be able to rebuild public trust and drive forward financial investment.

The FRC’s chairman, Sir Winfried Bischoff, states within the report that “it is essential that the UK maintains its position as an attractive capital market with a strengthened corporate governance framework underpinned by effective regulation”.

Never has this been truer than now, with Article 50 recently triggered by prime minister Theresa May and the world waiting to see how Britain’s economy fares. Naturally Brexit is causing concern amongst boards; especially as the UK’s decision to leave the European Union (EU) raises uncertainties around whether the EU’s General Data Protection Regulation (GDPR) will apply to UK firms, and whether it will affect agreements with the other countries they share data with.

Circumventing the Code

The UK’s Corporate Governance Code has played a key role in encouraging the adoption of best boardroom practice in listed companies since it was first issued 25 years ago. Interestingly, one of the key findings in the report is that while compliance with the Code is generally high, those that do not follow the code give poor reasons for not doing so.

It is concerning that such weak defences for non-compliance are being offered, considering the FRC specifically states in its guidelines that companies must provide clear reasoning when opting not to apply a provision within the Code. It calls this ‘comply or explain’, an arrangement that means businesses do have the flexibility to depart from the Code if needed. They are, theoretically, also prevented from using false statements as ‘scapegoats’ – an action that damages industry trust. Why? Because without clear reasoning stakeholder confidence will falter, followed by a decline in public trust and then investment.

The FRC believes the reason being shielded by non-compliant companies is that they are wrongly putting the needs of stakeholders ahead of shareholders. It’s an admission they do not want to make, and yet explanations are an extremely important stipulation – meaning companies pay lip service to both the needs of their shareholders and other stakeholders.

Pushing for change in the future, the FRC would like to see extra reporting by boards on how they discharge their responsibilities. It believes this improvement is so important that it has called upon the UK government for help in achieving its goal. However, this isn’t the only change the FRC sees as being necessary.

Ahead of any other actions being taken, boards must take the obvious – yet often overlooked – step of familiarising themselves with the provisions of the Corporate Governance Code. After all, if they don’t know the code, they don’t know when they are breaking it!

Once the code is clear, they must commit to the ‘comply or explain’ rule, ensuring they put detail into reasons given following any instance where they chose not to comply. Reporting, in general, must be frequent and accurate. Companies need to go beyond the basic requirements where possible. Only by doing this can they fully prepare for an eventuality where the FRC is granted an increase in power or tightens rules further.

Boards should aim to run meetings as efficiently as possible and concentrate on accurate reporting following any formal gathering. It seems a simple thing to say; however we know that boards are spending more time in meetings than ever before. A recent poll of 300 senior executives and board members about productivity in their meetings revealed that most reported that only half of each meeting is spent productively. In most cases, technology could easily be used to improve meeting efficiency. For example, an online board portal – a collaborative software that allows meeting attendees to securely access documents and collaborate with others online – could be employed.

Succession planning

A final tip for boards is to implement robust succession plans. Ensuring any intentions for new members are aligned with future business strategy will do wonders for stakeholder trust. Succession planning, as the FRC says in its report, is an ideal opportunity to promote diversity within business – something which many companies have been criticised for lacking in recent years.

The report also argues the need for nomination committees to make the link between board composition and company strategy, which encompasses succession planning – to ensure, again, the diverse range of skills needed to deliver success is present.

While the FRC’s report shouldn’t be taken as an urgent concern, Boards should absolutely pay attention to its findings and suggestions for improvement. Companies, it seems, are already taking steps to incorporate governance into their corporate culture. They must continue to do so if they hope to secure future investments and regain public trust. The above steps are easy to complete and will go a long way towards helping firms meet their governance and compliance goals.

 

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